Every few months there comes a time when there is lack confidence on direction but lot more conviction on volatility. In such times generally we do go on a backfoot and avoid to trade. However, one such strategy that comes in handy while trading such view is Back Ratio Spread
A situation, where we have firm view on volatility that there is a very bright chance of movement, the choice of Bull or Bear for a Biased Volatility can be made easily with choice of instrument Call or Put.
Back Ratio Spread is a strategy where for Bullish Biased Volatility, we need to Sell a Call of the strike closest to the current underlying level and Buy not 1 but 2 lots of a higher strike Call. If we wish to trade Bearish Biased Volatility view, we choose Puts. Here, we need to sell a Put of the strike closest to the current underlying level and buy 2 lots of a lower strike Put.
What this ends up doing at the beginning is it reduces the premium outflow considering the Higher calls/Lower Puts cost lower then the Call/Put of strike close to current level.
The situation we have at hand generally in these times is expecting either a big move upon crossover of the known hurdle on up/downside or similar if not equally fierce but a move in opposite direction in case of a failure. This gives limited probability to the underlying meandering around the same level.
Now for the outcome, in case the breakout or breakdown does come along the Call/Put sold does start bleeding but after a brief move rising impact of the 2 bought Calls/Puts come into play. This will help as in case of big moves loss in 1 Sold Call/Put will eventually be compensated and favorable pay-off will created by 2 bought options against one sold.
On the flip side if there is failure, meaning we were expecting a big respite and there ends up a break down with a Call Back Ratio Spread or vice-versa (with Put Back Raio Spread). We will still be better off than the rest of the market.